Clarification on How a Tax Exempt Status Will be Affected by VAT

July 12, 1990 BIR RULING NO. 133-90 103 (o) 145 (25-88) 133-90 Gentlemen : This refers to your three (3) letters all dated June 1, 1990 requesting clarification how your tax exempt status will be affected by VAT on your purchase of goods and services, by the ad valorem tax on your purchase of petroleum products; and by the 2% franchise tax on your proposed contract with La Union Electric Company (LUECO) to provide electric power to your voice of America/Philippine Relay Stations (VDA/PRS). It is represented that with respect to your purchase of goods and services, the present procedure is for your contractors to apply for zero-rating which are very often approved; that recently, you were informed by the VAT Division that your purchases of goods and services are not to be zero-rated but merely exempt; that with respect to your purchases of petroleum products from the oil companies, you would like to be advised of the procedure in availing of the ad valorem tax refund to your supplier; that in connection with your proposed contract with LUECO to provide electric power to your VDA/PRS, you would like to know whether LLIECO's billing to you should exclude the 2% franchise tax in view of your tax exempt status. In reply, please be informed that with respect to your local purchases of goods and services, Article 34 of the Vienna Convention on Diplomatic Relations adopted on April 18, 1961 provides that diplomatic agents, such as the personnel of the United States Embassy, are not exempt from indirect taxes of a kind which are normally incorporated in their purchases of goods and services, e.g., ad valorem tax (BIR Rulings No. 1-88 & 25-88); and obviously VAT, an indirect tax likewise incorporated on the price of goods and services. However, under the international laws principle of reciprocity, since it is officially recognized that your Government allows tax exemption on the purchase of goods and services by Filipino embassy personnel in your territory, the Philippines shall likewise recognize that the local purchases of goods and services by your embassy personnel are exempt from VAT. Revenue Regulations No. 10-89 amending Section 9 (b) (16) of Revenue Regulations No. 5-87 provides that the person claiming exemption from the value-added tax on his purchase of goods and services shall submit a copy of the special legislation or international agreement to the Commissioner or his authorized representative. Moreover, pursuant to Revenue Regulations No. 6-89, he shall also present four (4) copies of the VAT invoice required to be issued by the seller on its sales to entities which are exempt under International Agreements. The amount of sale stated in the invoice must be net of the VAT. In your case, the claim should be accompanied by the recommendation of the Department of Foreign Affairs. A tax exempt certificate shall then be issued to you (copy attached) in triplicate, the original to be given to the seller; the duplicate to you; and the triplicate to be retained on file with the BIR Office. Before such copies of the Certificate are given to you, all copies of the invoice shall be stamped with the words "VAT Exempt-Seller Not Entitled to Input Tax." The sale covered by the exemption certificate shall then be reported in the seller-supplier's VAT return as exempt sales. In support thereof, the original of the certificate shall be attached to his return. A copy of this ruling to be attached to your claim shall substitute for repeated submission of the copy of the special legislative international agreement every time you request for the issuance of the tax exemption certificate. On the other hand, the procedures for claiming refund of ad valorem tax on your purchases of petroleum products are indicated in the Note Verbale No. 81-2819 dated August 19, 1981 issued by the Department of Foreign Affairs, viz: " No . 81-2819 . The Director-General of Protocol presents its compliments to the Chiefs of the Diplomatic Mission and Head of Consular Establishment and has the honor to inform the latter of the procedure to claim refund of taxes paid on gasoline and other fuels used by the Mission, official and staff, to wit: "1. All requests for refund of taxes paid on gasoline and other fuels must be sent by the Mission to the Ministry of Foreign Affairs enclosing therein the cash sales invoices and written indicators Tabulated form) showing each and every purchase, the over all total purchases, and the diplomatic motor vehicles used. "2. The Ministry of Foreign Affairs, after taking not of the request, may forward the same with comments/recommendations to the Commissioner of Internal Revenue (Attention: The Chief, Gasoline and Miscellaneous Specific Tax Division), Quezon City; and "3. Thereafter, the Mission may wish to follow-up its request directly with the Commissioner of Internal Revenue." As regards your proposed contract with LUECO to provide your VDA/PRS facility with electric power, your request that billings to you should exclude the 2% franchise tax because of your tax exempt status, cannot be granted for lack of legal basis. Franchise tax is the direct liability of the franchise holder and when added to the cost of the service of providing you with electricity, it is no longer a tax but an additional cost which you have to pay to obtain the service. (Philippine Acetylene vs. Com., 20 SCRA, 1056) cdtech Very truly yours, (SGD.) JOSE U. ONG Commissioner